This is the case in California, and soon will be the case in Minnesota and New York.  For over six decades, businesses have avoided multistate income taxation relying on a federal law (P. L. 86–272) adopted in 1959.  P. L. 86–272 prohibits states from imposing income tax on income derived by an out-of-state business if the seller’s only business activity in that state is solicitation of orders for tangible personal property.  Orders must be sent outside the state for approval or rejection and filled from a point of shipment outside the state.  But if a seller accepts any orders within the state, or provides any services along with the remote sales of products, then the protections of this law do not apply.

On August 4, 2021, the Multistate Tax Commission (MTC), an intergovernmental agency that promotes uniformity across state tax codes, issued an interpretation of what types of remote interactions with a customer via website or app should be considered engaging in business activity and subjecting a seller to income taxation by the customer’s state.

California adopted that interpretation, issued guidance in 2022, and has begun enforcement via audit. [Note: this interpretation is currently being challenged in court.]  Earlier this year, the Minnesota Department of Revenue circulated a proposed notice adopting the MTC guidance. Under that guidance, activities by out-of-state businesses that would subject that business to income taxation in the state include the following:

(i) providing post-sale assistance to Minnesota customers via chat, email, or website, (ii) receiving applications via the Internet from Minnesota customers for branded credit card through its website, (iii)  inviting Minnesota residents to apply for non-sales positions via website, (iv) transferring Internet cookies onto the computers or devices of Minnesota customers for business purposes that include product development, inventory management, or market research; (v) offering and selling extended warranty plans via website to Minnesota customers; and (vi) contracting with Minnesota customers to stream digital videos and music to their devices for profit.

Bottom Line:  If your business is engaging in these activities for customers in California or New York, it is already purportedly subject to taxation. It appears that will soon be the case in Minnesota as well.

You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself. –Sam Levenson